Weekly Technical Market Outlook 9/29/2014

Last week in my Weekly Technical Market Outlook I discussed multiple divergences that were concerning me. Apparently I was not the only one as traders took stocks down 1.37% for the S&P 500 ($SPX). However, after Thursday’s close we had quite a few signs of mean-reversion flipping bullish. We saw a bounce on Friday and I’ll be watching to see if stocks continue to rise this week or if the divergences that are still in place keep buyers from pulling their triggers. With just two days left for the month, we sit with the S&P down roughly 1% for September, Small Caps ($IWM) are off 4.41%, and International stocks ($EFA) are down 2.91%.

Trend

As stocks fell last week we saw the S&P get close to testing its long-term trend line and 100-day Moving Average. Since neither of these measures were broken and we have yet to see a lower low, the trend remains positive.

trend

Breadth

We almost saw a lower low in the Common Stock-Only Advance-Decline Line, but the bounce on Friday keep things in an up trend. We now have a defined range of support and resistance: the August low and the September/July high. With last week’s selling we saw more stocks break below their 200-day Moving Averages as shown by the indicator in the bottom panel of the chart.

Breadth

Consumer Staples

In last week’s Technical Market Outlook I showed the Relative Rotation Graph for the nine S&P sectors. The Consumer Staples ($XLP) sector has been in the ‘lagging’ quadrant of the graph for the last eight weeks. But it has been rising for the last four as momentum of the relative performance trend has strengthened.

Below is a weekly chart of the ratio between $XLP and the S&P 500 ($SPY). It appears the recent strength in $XLP has created a false breakdown of the prior February low for the ratio. This false break also has occurred with the Relative Strength Index (RSI) creating a higher low, which produces a bullish divergence. I’ll be watching to see if $XLP can continue to gain ground.

When looking at the seasonal strength for the Consumer Staples sector, October has been the fourth strongest month over the last five years, up 75% of the time.

Consumer Staples

October Seasonality

My friend Ryan Detrick, CMT is constantly producing top-notch tables and charts on Twitter and his blog.  Over the weekend Ryan discussed a few points regarding October seasonality. When looking at the 2nd year of the Presidential Cycle since 1950, Ryan noted that October has been the strongest month of the year. While I acknowledge that 16 occurrences is not a robust sample size, it’s still an interesting stat to point out. Will this October follow its historical trend?

Here’s Ryan’s table showing the monthly breakdown:

2yr year prez cycle seasonality

Momentum

Not much has changed for the Momentum chart from last week. While price weakened, the Relative Strength Index remained above its previous level of support. Both the RSI and the MACD remain in a bearish divergence with price, something bulls know they must fix in order to see another new high.

Momentum

U.S. Dollar

The dollar rose 1.05% last week and is up almost 9% from its May low. It’s interesting to note that the U.S. dollar has been up for 11 weeks in a row! While the currency has been on a tear over the last several months, traders do not appear to have let up off the gas based on the latest COT data. The chart below comes from Eric Burroughs and shows the Speculator net-position which is at its highest level ever.

Burroughs also noted that when you take into account Open Interest with respect of the net-position that it’s not at a record high but is nearly two standard deviations above its mean.

Dollar COT

60 Minute S&P 500

The intraday chart for the S&P shows that price found support at the trend line connecting the series of lower lows for September. We’ve yet to see price break its series of lower highs and remains under its 50-1 hour Moving Average.

60min

Last Week’s Sector Performance

Last week we saw the Materials sector ($XLB) take the top spot in relative performance against the S&P. Consumer Staples ($XLP) and Health Care ($XLV) were the second and third best performers, respectively. The Industrial ($XLI), Energy ($XLE), and Utility ($XLU) were the worst performing sectors for the week.

Sector week

Year-to-Date Sector Performance

Health Care, Utilities, Technology ($XLK) remain the strongest sectors for 2014. Consumer Discretionary ($XLY) and Industrials have been the weakest sectors YTD.

sector YTD



Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Weekly Technical Market Outlook 9/22/2014

When a doctor is attempting to diagnosis a patient he or she will attempt to collect as much information as possible regarding the patients symptoms. Based on the different aliments, the doctor can then make their diagnosis. I think right now the U.S. equity market is showing some negative symptoms. This doesn’t mean we need to call the morgue but there seems to be something happening based on the internals and the information price action is providing us. While the current deterioration is concerning, we are close to finishing out one of the historically weakness months of the year and are approaching the strongest six-month period for stocks.Will that be enough to correct the concerns shown on the charts? We’ll see.

Since the short-term low on Sept. 15th we’ve seen price advance to hit new highs. However at the same time we’ve seen the number of stocks making new 52-week lows on the NYSE also climb higher right along with price. Normally we see this data set decline when price is heading higher. While the S&P 500 ($SPY) was just a few points away from its record high, we saw the number of new 52-week lows hit its highest level since December 2013! And this all happened on the largest amount of volume on the S&P 500 since March.

Trend

With the new high in the S&P 500 ($SPX) the trend remains positive. The major index has now climbed back above its 20-day Moving Average and remains above its 100-day MA and long-term trend line.

trend

Breadth

As many noted last week, breadth for the equity market has begun to struggle. The support that has now become resistance (dotted red line) for the Common Stock-Only Advance-Decline Line remains above the indicator as the A-D line approaches its long-term trend line (solid red line). While breadth remains in an up trend, it’s begun the process of changing trend as we now have a lower high and we may see a lower low if it can get back to 9,800.

I also want to note, although they aren’t shown on the chart, that the Volume A-D Line, the S&P 500 A-D Line, and the more widely discussed, NYSE A-D Line have also not confirmed the most recent high in the S&P 500.  While each measure I just mentioned varies in its degree of divergence, its interesting that warning signs are going up on each of them.

breadth

S&P 500 Relative to 52-Week High-Low

I’ve shown a similar chart like this before, except it was for the Dow Jones Industrial Average. Today I want to look at the S&P 500. In the bottom panel is an indicator created by DecisionPoint that looks at the average ‘score’ of each of the S&P 500 stocks based on their relative position vs. their 52-week high and low. For example, if it’s at a 52-week low it’ll earn a ‘score’ of 0, if a stock is in the middle between its respective high and low then its score would be 50, and so on.

I use this tool for two purposes. One, to look for potential signs of mean reversion, as stocks tend to pull back on the short-term when the average score gets above 80 and puts in a short-term low when its falls under 60 during a defined up trend.

Second, for divergences with price. During the last two years, as shown on the chart below, we’ve seen the indicator consistently touch the 80 mark as price ebbed and flowed higher. However, most recently the average score for the S&P 500 stocks has drifted lower, forcing the indicator to divergence from price. The most recent new high saw the average score for the index right around 75. This is another potential sign that participation in the equity market is beginning to wane.

Relative to 52wk

Momentum

Another example of the increasing number of divergences can be found on the chart I show each week for momentum. The bearish divergence that started a couple of weeks ago is still ‘in play’ and became more severe as another lower low was created this past week in the Relative Strength Index (RSI). The MACD indicator, which also has been diverging from price, has yet to have its histogram break back above zero.

While we did see the RSI indicator hold its mid-point (50) during the most recent short-term drop, which is positive for the ‘health’ of momentum. The divergences that continue to plague the U.S. stock market continues to issue yellow flags for the current up trend. I’ll be watching to see if price confirms these warning signs or if they go ignored and price keeps heading higher.

momentum

Crude Oil

Last week I wrote a post about Gasoline, looking at the latest price action, COT data, Sentiment, and Seasonality. As it appears gas prices may be heading higher, crude oil ($CL_F) also seems to be finding some support.

Below is a weekly chart of the United State Oil Fund ($USO) going back to mid-2010. By connecting the series of higher lows since 2012 we can create a trend line that price is currently testing. At the same time the Relative Strength Index in the top panel of the chart is also testing support based on two prior lows.

It’s always interesting to see two markets that are connected like Gasoline and Crude Oil begin to show similar signs of bottoming out based on different sets of data. We’ll see if the oil bulls come back to the table and take price higher or if support gives way and oil continues to fall.

USOVolatility

I often look at the relationship between the 1-month and 3-month Volatility contracts as they enter and exit backwardation and contango. But today I’ve flipped the ratio, with the follow chart showing the S&P 500 and the 3-month $VIX divided by the 1-month $VIX. The ratio between these two contracts is now near the higher end of its range over the last year. While it has gone higher, traders are currently pricing in much less volatility in the short-term relative to 3-months out. I’ve put a blue line to show the current level compared to past instances. Is this a sign of too much optimism?

VXV VIX

Relative Rotation Graph – Sectors

Last week we looked at the Relative Rotation Graph for the nine S&P sectors. Go here to see last week’s chart and get a better explanation of what’s being shown. I highlighted last Monday that Financials ($XLF) appeared to be strengthening, and it seems that continued during trading last week as the momentum of the trend in relative performance increased for the sector. Health Care ($XLV) also saw an increase while Technology ($XLK), which is still firmly in the ‘leading’ category, saw its momentum of the trend in relative performance drop by a few points. Energy ($XLE) also continues to decline, seeing the largest move of the nine sectors.

RRG

Relative Rotation Graph – International

I normally only show the S&P sectors on the RRG, but I found the graph for international ETFs pretty interesting too. While I’ve shown multiple charts in this post pointing out the weakening internals for the U.S. equity market, that does not seem to be persuading traders from showing favor to domestic markets relative to international.

Nearly every country-specific ETF is in the ‘Lagging’ category or is moving towards it. The two countries that are currently showing strength compared to the S&P 500, Mexico ($EWW) and Hong Kong ($EWH), have begun to decline and are heading towards ‘Weakening’ and we currently have no Int’l ETFs in the ‘Improving’ category. I find this very interesting as traders are being very apparently in their bias for U.S. markets.

RRG intl
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Are Gas Prices Headed Higher?

Gas prices have been heading lower over the last several months and are down 19% since the June high. This has been great news for drivers and especially those families taking road trips during the summer. However, it appears we may start paying more at the pump as prices begin to bottom out.

Price and Momentum

Below is a daily chart for the spot price of Unleaded Gasoline ($RB_F) since mid-2012. You’ll notice that the price of gas has been trading in a wide range over the last several years, and is currently sitting at the bottom end of that range. In 2013 we saw gas prices put in a low near the 2012 low, around $2.50. This happens to be where gasoline is now and we may see this previous floor become support.

For those familiar with my writing, you know I’m always looking for a divergence in momentum. I often look for when the Relative Strength Index (RSI), as shown in the top panel of the chart below, begins to rise while price makes lower lows. This bullish divergence often leads to a trend change, and in this case could be hinting at higher prices for unleaded gasoline.

Gasoline

Seasonality

While price may be searching for support at prior lows, next I want to look at the seasonal trend for gasoline. Below is a 5-year seasonal study created by the Signal Financial Group. Over the length of the current bull market the decline in gasoline prices has bottomed in late September. It appears seasonality supports the notion that price may be creating a low point at or near its current level.

Seasonality for GasolineCommitment of Traders

Next lets take a look at how futures and option traders are positioned in the Unleaded Gasoline market, courtesy of a chart from Tom McClellan. Tom wrote in his recent newsletter, “Commercial traders of RBOB gasoline futures have been continuously net short since 2005,  So the game consists of evaluating the current position relative to the recent values.  On that accord, what we are seeing is a bottom-worthy condition that should lead to rising gasoline prices in the weeks ahead.”

As the chart below shows, Commercial Traders, often considered the ‘smart money’ are holding a historically low-level of net-short positions. Past instances of them not being heavily net-short gasoline futures has led to an increase in price over the following weeks and sometimes months.

COT for Gasoline

Sentiment

Finally, I want to look at the sentiment data for gasoline. This chart comes from SentimenTrader.com, who produces some of the best sentiment charts and data sets available. Optimism towards the gasoline market has never been this low, going back to 2006. When the sentiment indicator in the bottom panel of the chart goes below 30 we’ve typically seen a low put in for gas prices, the current reading is an all-time low of 22! Sentiment levels often are just noise, but it’s when the hit an extreme that they became more important. With Optimism at a fresh low, I would say this is a pretty extreme level.

Sentiment for Gasoline

When we see multiple sets of data connect like this it can help make a stronger case for a potential move within a market. We have the price testing support, momentum creating a positive divergence, the time period where gas prices seasonally bottom is approaching, the ‘Smart Money’ has decreased their net-short positions to a historically low-level, and sentiment has hit a new low. While I allow price to control my bias, it seems we may be setting up for paying more at the pump as gas may be heading higher.

Source:  A Gasoline BOTTOM?!! (McClellan Financial Publications) 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.